Achieving Homeownership After a Foreclosure: Report

10/30/2012 By: Esther Cho

Apparently, if one loses his or her home to foreclosure, the waiting period to qualify for another mortgage can easily be another decade.

According to a report from the Federal Reserve Bank of San Francisco, a mere 10 percent of borrowers with a history showing a serious delinquency were able to obtain a mortgage again within 10 years.

In addition, subprime borrowers, or those with credit scores lower than 650, have an even more difficult time returning to the market.

For borrowers who end their mortgage for a reason other than default, they were able to access mortgage credit about two-and-a-half times faster compared to those who went into default.

The report was based on analysis using Equifax data in the New York Federal Reserve Bank’s consumer loan file. Mortgages were counted as being in default if they were either 120 days past due or past due and reported to have a charge-off or foreclosure.

The timeline for credit accessibility varied, however, when observing the rate of return based on different years. In 2001, 30 percent of borrowers who defaulted were able to take out another mortgage within 10 years. In 2008, the rate of return was much slower. For example, after almost four years, the rate of return for borrowers in 2008 was about 5 percent, but in 2001 during the same period, it was above 15 percent.

The authors of the report, William Hedberg and John Krainer, attributed the low rate of return in 2008 to lack of demand. In the early 2000s, demand for housing was strong, but following the Great Recession, uncertainty about jobs and income may have caused people to become “unwilling or unable to demand housing,” the report explained.

While borrowers with prior defaults are influenced by conditions such as unemployment and home price growth, the report said, “the best predictor of when a defaulting borrower returns to the market is the change in the borrower’s credit score.”

The researchers found that a typical borrower who experiences foreclosure will have a credit score below 600, no matter what their score looked like prior to the derogatory mark. But after five years, the report said, “borrowers who return to the mortgage market after a default have experienced a more-than-100 point increase in their score.”

With an estimated 4 million foreclosures since 2007, according to the report, the movement toward homeownership will be a gradual one for millions.

In response to the homeownership rate, Capital Economics released a report, authored by Paul Diggle, projecting a worsening rate.

“We think that continued tight credit conditions and plenty more foreclosures could see the homeownership rate fall slightly further yet,” wrote Diggle.

Even though the rate is expected to decline, Capital Economics expects the recovery to be able to continue with investors leading the way.

“Indeed, it’s hard to escape the conclusion that the sustainability of the housing recovery depends on how robust investor demand proves to be. Our view is that, for the next few years at least, institutional and individual investor demand will hold up well,” Capital Economics stated.